Theoretical and empirical research has indicated that overconfidence affects merger decision-making and merger premium. However, founder-CEOs have not been subject of such a study, yet. This lack is particular surprising when considering the differences between founder and manager-CEOs as well as the media attention of founder-CEOs. The present dissertation aims to fill the research gap through investigating the effect of founder-CEO overconfidence on merger premium in the high-tech industry. Moreover, this dissertation aims to extend the literature by including target CEO overconfidence and studying the impact on merger premium when both, acquirer and target CEO are overconfident. By studying founder-CEOs this dissertation also aims to establish the effectiveness of founders as CEOs. The resource-based perspective argues that while founders help in the early years of the company, they become less effective as the firm evolves, since they lack the necessary management skills.
Design/methodology/approach – Using ordinary least square (OLS) technique, this study investigates the effects of implemented factors in determining the merger premium paid in high-tech acquisitions. A sample consisting of 245 acquisitions in the high-tech industry of 124 CEOs during a 19-year period (1995 to 2013) has been observed. In order to test the founder-CEO effects, this dissertation develops a matched sample approach of 62 founder-CEOs and 62 manager-CEOs.
This study shows a strong relationship between CEO overconfidence and acquisitions premium paid. The results suggest that the CEO overconfidence may provide an explanation for the well-rehearsed overpayment problem. An additional analysis indicates that the highest premium is paid when combined acquiring and tar-get firm CEO overconfidence exist. The dissertation also shows that founder-CEOs pay higher premia than manager-CEOs in the high-tech industry. It has been proven that founder-CEOs’ decisions are more independent from interventions of the board of directors and that founder-CEO overpayment is not dependent on the company’s size or relatedness of mergers. The findings are reliable as the results remain constant for applied robustness tests.
Table of Contents
CHAPTER ONE: INTRODUCTION
1.1. Aim of the Chapter
1.2. Background and Context to this Study
1.3. Rationale, Aims and Intended Contribution
1.4. Outline of the Dissertation
CHAPTER TWO: LITERATURE REVIEW
2.1. Aim of the Chapter
2.2. Merger Premium and M&A in the High-Tech Industry
2.2.1. Review of Merger Premium Determinants
2.2.2. Review of M&A in the High-Tech Industry
2.3. CEO Overconfidence
2.3.1. Concept of Overconfidence
2.3.2. Review of Overconfidence and Merger Premium
2.3.3. Review of Overconfidence Measures
2.4. Review of Founder-CEO Characteristics
2.5. Reflection on the Literature Review
2.6. Hypotheses Development
CHAPTER THREE: RESEARCH METHODOLOGY AND DATA SAMPLE
3.1. Aim of the Chapter
3.2. Variables Description
3.2.1. Dependent Variable
3.2.2. Overconfidence Measure
3.2.3. Control Variables
3.3. Data Sample
3.3.1. Sample Collection and Sources
3.3.2. Sample Description
3.3.3. Trend Developments
3.4. Research Method
3.4.1. Ordinary Least Square (OLS)
3.4.2. Dissertation Model
3.4.3. Time Fixed Effects
CHAPTER FOUR: EMPIRICAL RESULTS AND ANALYSIS
4.1. Aim of the Chapter
4.2. Correlation Matrix
4.3. OLS Regression Results
4.3.1. Impact of Founder-CEO Overconfidence on Merger Premium
4.3.2. Impact of Acquirer and Target CEO Overconfidence on Merger Premium
4.3.3. Founder-CEO Merger Decision-making – Differences between Merger Premia paid by Founder-CEOs and Manager-CEOs
4.4. Robustness Checks
4.4.1. Corporate Governance and CEO Overconfidence
4.4.2. Media Portrayal as Measure of Overconfidence
4.4.3. Principle Component Analysis
4.5. Summary of Empirical Findings
CHAPTER FIVE: CONCLUSION
5.1. Aim of the Chapter
5.2. Summary of the Study and general Conclusions
5.3. Contributions
5.4. Limitations and Direction for further Research
Research Objectives and Key Topics
The dissertation investigates the influence of founder-CEO overconfidence on merger premiums within the high-tech industry. It aims to determine whether overconfident founders—compared to professional manager-CEOs—contribute to the well-known "overpayment problem" in M&A activities, while also examining the impact of dual overconfidence between acquirer and target CEOs.
- Analysis of founder-CEO characteristics in comparison to manager-CEOs.
- Development of a new multidimensional overconfidence proxy based on national, religious, cultural, and gender factors.
- Empirical assessment of merger premiums in high-tech acquisitions using OLS regression.
- Investigation of the effectiveness of corporate governance in mitigating CEO overconfidence effects.
- Examination of the interplay between acquirer and target CEO overconfidence on transaction outcomes.
Excerpt from the Book
2.3.1. Concept of Overconfidence
The impact of behavioural finance is discussed since psychological aspects of decision-making questioned Fama’s (1970) Efficient Market Hypothesis. Behavioural finance attempts to explain how and why emotional, social and cognitive factors influence individuals’ decision-making (Tversky and Kahneman 1974). The basic concept is that decision makers are prone to cognitive errors. Researchers observed that psychological biases – such as overconfidence, anchoring or framing – deviate people from acting purely rational.
One of the key psychological drivers is overconfidence. Langer (1975) defines overconfidence as the overestimation of one’s ability and of outcomes relating to one’s personal situation. Moore and Healy (2008, p.502) however observed that most empirical papers use the definition that ‘overconfidence is the overestimation of one’s actual ability, performance, level of control, or chance of success’. Empirical studies observed the overconfidence bias (e.g. Fischhoff et al. 1977, Weinstein 1980, Buehler et al. 1994). One vivid study was conducted by Kahneman and Riepe (1998). The authors’ study reports that 80% of the participants evaluated themselves as better drivers than the average.
The role of managerial overconfidence in firm decision-making is investigated in the corporate finance literature. Chatterjee and Hambrick (2007), for example, conduct a large sample empirical test on CEO overconfidence and its impact on firm strategy and performance. The authors came to the conclusion that overconfidence of leaders is often associated with risky decision-making.
Summary of Chapters
CHAPTER ONE: INTRODUCTION: This chapter introduces the research topic, providing background on M&A in the high-tech sector, defining overconfidence, and outlining the rationale and objectives of the dissertation.
CHAPTER TWO: LITERATURE REVIEW: This chapter reviews theoretical and empirical literature concerning merger premiums, CEO overconfidence, and founder-CEO characteristics to identify research gaps and develop testable hypotheses.
CHAPTER THREE: RESEARCH METHODOLOGY AND DATA SAMPLE: This chapter details the data collection process, defines the variables used, and explains the research methodology, including the OLS regression model and the creation of a new overconfidence index.
CHAPTER FOUR: EMPIRICAL RESULTS AND ANALYSIS: This chapter presents and discusses the regression results of the study, performs robustness checks, and summarizes the empirical findings regarding founder-CEO overconfidence and merger premiums.
CHAPTER FIVE: CONCLUSION: This chapter summarizes the study's conclusions, highlights its contributions to academic literature and professional practice, and discusses the limitations of the research alongside suggestions for future study.
Keywords
Founder-CEO, CEO Overconfidence, Merger Premium, High-Tech Industry, Mergers and Acquisitions, Behavioural Finance, Overpayment, Corporate Governance, Strategic Leadership, OLS Regression, Founder Characteristics, Cognitive Bias, Market Value Premium, Firm Performance, Managerial Decision-Making
Frequently Asked Questions
What is the core subject of this research?
The research examines the impact of founder-CEO overconfidence on the premiums paid in mergers and acquisitions within the high-tech industry.
What are the primary themes addressed?
The key themes include behavioral finance, strategic leadership of founder-CEOs, merger premium determinants, the role of corporate governance, and psychological biases in decision-making.
What is the primary objective of this dissertation?
The main goal is to fill the research gap regarding how founder-CEO overconfidence affects the overpayment problem in high-tech M&A and to assess if this behavior differs from that of professional managers.
Which methodology is applied in the study?
The study utilizes an Ordinary Least Square (OLS) regression technique applied to a sample of 245 acquisitions conducted between 1995 and 2013, supported by a newly developed multidimensional overconfidence index.
What does the main body of the work cover?
It covers literature review, hypothesis development, detailed research methodology, empirical analysis of regression results, and robust checks using alternative proxies like media portrayal.
Which keywords define this work?
Core keywords include Founder-CEO, Overconfidence, Merger Premium, High-Tech Industry, M&A, Behavioural Finance, and Corporate Governance.
Does the study distinguish between founder-CEOs and manager-CEOs?
Yes, the study specifically develops a matched sample approach of 62 founder-CEOs and 62 manager-CEOs to compare their decision-making and the premiums they pay.
How is the new measure of overconfidence constructed?
The new index is built upon seven binary variables capturing national, religious, cultural, and gender-related personal characteristics of the CEO, offering a more flexible proxy than traditional financial measures.
Does corporate governance influence the findings?
The study tests for the mitigating effects of corporate governance but concludes that it does not significantly ameliorate the overconfidence-driven overpayment behavior in the studied sample.
- Quote paper
- Christoph Meyer (Author), 2014, The Effect of Founder-CEO Overconfidence on Merger Premium, Munich, GRIN Verlag, https://www.grin.com/document/299190
